International Trader - Europe

Euro Banks Are Not All a Bust

Selective investors could profit nicely from those European banks with limited exposure to sovereign-debt crisis areas. A Paris manager likes Santander, BNP and Intesa Sanpaolo—and several Northern European bankers, too. SocGen: "Financials are on fire."

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The worst may be over for some European banking stocks—and they could be in line to rebound, big-time.

"If you are convinced that European banks are not going to collapse, then you could make 50% to 100%," in the medium term, says Marc Renaud, founder of fund managers Mandarine Gestion in Paris. He sees "good value in some European banks, because the market always goes too far."

A colossal caveat: "Be very selective." This isn't for the fainthearted.

But the sentiment's gaining popularity. Financial stocks were the biggest losers last year, shedding about a quarter of their value. Yet they've bounced back since Jan. 1: Financial issues have already climbed 9.3%—the second-best performing sector in the Stoxx Europe 600 Index, behind basic materials, which are up 11.6%. And they still have room to run. "Financials are on fire," writes Société Générale.

Don't be fooled into thinking that the European banking industry's problems are anywhere near over. Banks are still mired in tortuous negotiations with Greece over the extent of the haircut they will take on their holdings of Greek government bonds, and there still is a chance of a disorderly default. Then there is the small matter of the 115 billion euros (€1 currently fetches about $1.30) in fresh capital that the European Banking Authority demands banks raise by June 30, in order to meet tougher capital-adequacy requirements.

BNP Paribas had a liquidity problem rather than a capital issue, says Renaud, who estimates that even a 100% haircut on the value of its €3.5 billion holding of Greek government debt wouldn't wipe out a year's profit. The bank is a leading lender to oil companies. BNP Paribas shares, which closed Friday at €35.33, have jumped 16% in value since the start of the year, and currently trade at 5.8 times estimated 2012 earnings; dividend yield is 5.9%.

Santander has been punished because it's based in Spain, although it generates only a quarter of its income in its home market, says Renaud. "These guys will be the winners of the crisis, because they are good bankers," he adds. Santander acquired a nationwide network of banks in the U.K. for a nominal sum. Santander's shares closed Friday at €5.91, 6.9 times estimated 2012 earnings and offer a dividend yield of 8%.

Intesa raised €5 billion in capital last year, and currently trades at a cheap price-to-book value of just 0.4 times. Its stock closed Friday at €1.38, 8.7 times estimated 2012 earnings; the dividend yield is 5.8%. Brokerage Citi notes Intesa has the strongest capital position and liquidity profile of the major Italian banks.